Relax everyone - the IMF says most of the slowdown in global trade is about weak growth

The sharp slowdown in global growth has been an area of concern recently for policymakers. The fulcrum of that concern has been trade policy and protectionism.

But in a special investigation into the issue, the IMF, in its latest quarterly economic outlook says “the slowdown in trade growth since 2012 is to a significant extent, but not entirely, consistent with the overall weakness in economic activity”.

That might be the wake up call global policymakers need to abandon austerity and fiscal rectitude, and reconsider the benefits of well-targeted fiscal and infrastructure spending.

That’s especially the case given the IMF suggests that an uptick in domestic and global growth can alleviate the problem (emphasis added):

Weak global growth, particularly weak investment growth, can account for a significant part of the sluggish trade growth, both in absolute terms and relative to GDP. Empirical analysis suggests that, for the world as a whole, up to three-fourths of the decline in trade growth since 2012 relative to 2003–07 can be predicted by weaker economic activity, most notably subdued investment growth.

But even though the organisation says trade is mostly about growth, something that is not only intuitively appealing but empirically correct by the IMF’s own admission, they still focus on trade policy.

The IMF says that “the empirical estimate may overstate the role of output, given the feedback effects of trade policy and trade on growth” which means “changes in the composition of demand account for about 60% of the slowdown in the growth rate of nominal imports relative to GDP”.

It says that “trade policies and global value chain participation account for a sizable share of the unpredicted shortfall in annual global trade growth since 2012”.

But it also highlights that the “quantitative contribution of trade policies to the slowdown in trade growth has been limited so far, protectionist measures could significantly weigh on global trade if they become more widespread”.

The IMF is clearly worried about the spread of such policies. But for the moment at least their analysis shows that to fix trade we mostly need to just fix economic growth around the world.

And that suggests more investment, and fiscal spending will be necessary to get things moving again.